Breaking Cases

Published on: March 5, 2021

Lax & Neville is Investigating Claims Against Broker-Dealers and Financial Advisors who Sold GPB Capital Investments to Investors

On February 4, 2021, the Securities and Exchange Commission (“SEC”) charged three individuals and affiliated entities with running “a Ponzi-like scheme” that raised over $1.7 billion by selling unregistered, high commission private placements issued by GPB Capital Holdings, an alternative asset management firm. The SEC alleges that David Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, lied to investors about the source of money used to make the annual distribution payments to investors. According to the Complaint filed by the SEC in the U.S. District Court, Eastern District of New York, GPB Capital actually used money raised from investors to pay portions of the annualized 8% distribution payments due on private placements sold to earlier investors. The SEC complaint alleges that GPB Capital, Mr. Gentile, and former GPB Capital managing partner, Jeffrey Lash, manipulated the financial statements of certain funds managed by GPB Capital to give the false appearance that the funds’ income was sufficient to cover the distribution payments – when in fact it was not.

In addition, the SEC complaint alleges that GPB Capital allegedly violated whistleblower protection laws by including language in separation agreements that forbade individuals from coming forward to the SEC, and by retaliating against whistleblowers.

Financial advisors sold GPB Capital private placement investments to their customers, including retirees and unsophisticated investors. The 8% annual distribution payment appealed to investors. Those payments, however, stopped in 2018. In 2019, GPB’s chief financial officer was indicted and GPB Capital reported sharp losses across its funds. Following the announcement, some broker-dealers allegedly instructed their broker-dealer clients to remove GPB issued private placements from their platforms within 90 days. Investors of the GPB private placement investments paid as much as 12% of the money they invested to broker-dealers in the form of fees and commissions. Brokers and financial advisors allegedly touted and pushed these investments onto their clients, thousands of which are retirees and unsophisticated, and in some instances over concentrated their portfolios in GPB Capital. Private placement investments are risky investments only suitable for sophisticated, accredited investors who understand the risks and can afford to lose their investment. Financial advisors and brokers have duties to recommend investments that are suitable to their clients and perform due diligence on the investment products they recommend and sell to investors. If your financial advisor sold GPB Capital investments to you, you may have a claim to recover your investment losses.

Published on: January 11, 2021

Amarin – A Highly Risky Speculative Biotech Stock Sold to Investors

By Lax & Neville LLP

Lax & Neville LLP is investigating claims involving Amarin, a speculative biotech stock recommended and sold to investors by financial advisors. Amarin is a biopharmaceutical company with one significant commercial product, Vascepa, a fish oil drug designed to reduce cardiovascular risk among patients with elevated risks of cardiovascular events and elevated triglyceride levels. Amarin’s stock skyrocketed from $3 a share to $18 a share in a single day following the release of positive clinical data in September 2018, (and traded in that range, including in the mid to low $20s during the next 18 months), but declined to low single digits in March 2020 after losing a key patent litigation decision. See Amarin Pharma v. Hikma Pharmaceuticals USA Inc., Case No. 2:16-cv-02525-MMD-NJK (D. Nev. 2016). The patent litigation was a known risk to the stock, and eventually caused a collapse in Amarin’s share price.

Upon information and belief, financial advisors at Morgan Stanley and other brokerage firms solicited and concentrated customer accounts in Amarin, even while the company was defending its patent on Vascepa in litigation. This litigation was a material risk in any Amarin investment. If generic versions of Vascepa could enter the market, Amarin’s sales would be substantially reduced, and even if the introduction of generic versions did not start right away, the perception that their development would create could also materially impact Amarin’s value and stock price.

Upon information and belief, financial advisors failed to adequately disclose the risks of investing in Amarin and in having concentrated positions in one stock. Financial advisors have duties, including a fiduciary duty, to provide customers with full and fair disclosure of all material facts, such as the risks of litigation, the ongoing risks of overconcentration; and to diversify an investor’s portfolio. Financial advisors also have a duty to continually update “buy,” “hold,” and “sell” recommendations for any security. Financial advisors must develop a suitable plan for customers’ investments, and to recommend transactions and investment strategies only where they have a reasonable basis to believe that their recommendations are suitable for the customer based on the customer’s financial needs, investment objectives, investment experience, risk tolerance, and other information that they know and have obtained about the customer. An investment in Amarin, particularly in concentrated positions is risky and not suitable for all investors. The failure by a financial advisor to provide suitable investment advice with fair and balanced risk disclosures is a violation of his or her fiduciary duties and other duties.

Published on: October 1, 2020

MASSACHUSETTS SUPERIOR COURT CONFIRMS ADVISORS’ $2.094 MILLION ARBITRATION AWARD AGAINST CREDIT SUISSE, INCLUDING INTEREST AND ATTORNEYS’ FEES, FOR ITS UNLAWFUL WITHHOLDING OF DEFERRED COMPENSATION

By Lax & Neville LLP

On August 31, 2020, the Massachusetts Superior Court confirmed a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award against Credit Suisse for more than $2 million owed to four former Credit Suisse advisors represented by Lax & Neville LLP, including approximately $1.6 million in unlawfully withheld deferred compensation, more than $83,000 in costs and more than $411,000 in attorneys’ fees.

The former Credit Suisse advisors sued Credit Suisse for, among other things, violations of the Massachusetts Wage Act, breach of contract, breach of the implied covenant of good faith and fair dealing and unjust enrichment after it closed its U.S. wealth management business on October 20, 2015 and unlawfully cancelled their earned deferred compensation. On February 14, 2020, a three-member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay compensatory damages totaling $1,602,609.95 plus costs, interest and attorneys’ fees.

Credit Suisse petitioned the Court to vacate in part or modify the Award, challenging the Panel’s authority to award attorneys’ fees on the basis that the advisors had no contractual right to attorneys’ fees and that Credit Suisse did not agree to submit the issue of attorneys’ fees to the Panel. In rejecting Credit Suisse’s petition and refusing to modify or vacate the Award, the Court held that Credit Suisse itself had originally submitted a request for attorneys’ fees against its four former advisers, giving the Panel the authority it needed to award attorneys’ fees. Under New York law, which governed the parties’ agreements, a mutual request for attorneys’ fees forms a binding contract between the parties and authorizes a Panel to award attorneys’ fees. The Court further noted that given Credit Suisse’s many losses in the Credit Suisse Deferred Compensation Arbitrations, its surprise at, and defense to, the Panel’s award of attorneys’ fees when both parties had requested them was unreasonable, stating that the “theory should have come as no surprise to Credit Suisse, which had already been required to pay the attorney’s [sic] fee of the prevailing party in another arbitration,” referencing the $585,307 in compensatory damages, $131,694 in interest and $146,326 in attorneys’ fees awarded to Brian Chilton, another former Credit Suisse financial advisor represented by Lax & Neville LLP. Another $1.34 million in attorneys’ fees were also awarded to former Credit Suisse advisors Joseph Lerner and Anna Winderbaum and Richard DellaRusso and Mark Sullivan, all of whom were represented by Lax & Neville LLP, as well as Christian Cram, Andrew Firstman and Mark Horncastle.

Published on: July 31, 2020

Merrill Lynch and At Least One of its Top Brokers Face Investigation Over Alleged $200 Million Losses Due To Churning After Paying a Record $40 Million Settlement in a FINRA Arbitration

By Lax & Neville LLP

The New Hampshire Bureau of Securities Regulation is reportedly investigating Merrill Lynch and Charles Kenahan, one of its top-producing brokers, over customer complaints alleging “churning” in their accounts that resulted in damages of approximately $200 million. Churning, or excessive trading, occurs when a broker or financial advisor trades securities in a customer’s account at high frequency in order to generate commissions rather than advance the customer’s best interests. According to multiple sources familiar with the New Hampshire securities regulator’s investigation, the churning claims that alerted the regulator stem from two arbitrations filed before the Financial Industry Regulatory Authority (“FINRA”), one by former New Hampshire Governor Craig Benson and the other from Benson’s long-time friend and business partner, Robert Levine.

According to CNBC, which obtained documents from the FINRA arbitrations, Benson’s claim, currently pending before FINRA, names Merrill Lynch, Kenahan, and another Merrill Lynch advisor Dermod Cavanaugh and alleges damages in excess of $100 million due to churning and unauthorized trading. Levine’s arbitration claim sought approximately $100 million in damages based on allegations of churning, unsuitable investment recommendations and misrepresentation.

According to news outlets, Benson and Levine originally met Kenahan through Cavanaugh, who had been the accountant for Cabletron Systems – a company Levine and Benson co-founded out of Levine’s garage. Levine and Benson said they thought they could trust and that Cavanaugh and Kenahan would act in their best financial interests, so they decided to move their individual investment accounts into the care of the two men.

Published on: July 21, 2020

Merrill, Ledford and Jerzieski Sentenced By Federal Judge in a $396 Million Investment Fraud Ponzi Scheme

By Lax & Neville LLP

In October 2019, a Maryland District Court judge sentenced Kevin B. Merrill, a salesman, and Jay B. Ledford, a former CPA, to 22 years and 14 years in federal prison, respectively, each followed by three years of supervised release, arising from an investment fraud Ponzi scheme that operated from 2013 through September 2018 and raised more than $345 million from over 230 investors nationwide. The judge ordered Merrill and Ledford to pay full restitution for victims’ losses, which is at least $189,166,116, plus forfeiture of additional sums still to be determined. Cameron R. Jezierski, a key employee of two companies controlled by Merrill and Ledford, was sentenced in November 2019 to serve 2 years in prison and an additional year of home confinement for his role in the fraud. The criminal charges and recent sentencing stem from an action filed by the U.S. Attorney’s Office for the District of Columbia.

In a parallel action, the U.S. Securities and Exchange Commission’s (“SEC”) filed a complaint in federal district court in Maryland in September 2018 against Merrill, Ledford and Jezierski alleging that, from at least 2013 to 2018, they attracted investors by promising substantial profits from the purchase and resale of consumer debt portfolios. Consumer debt portfolios are defaulted consumer debts to banks/credit card issuers, student loan lenders, and car financers which are sold in batches to third parties that attempt to collect on the debts. Instead of using investor funds to acquire and service debt portfolios—as they had promised— Merrill, Ledford and Jezierski allegedly used the money to make Ponzi-like payments to investors and to fund their own extravagant lifestyles, including $10.2 million on at least 25 high-end cars, $330,000 for a 7-carat diamond ring, $168,000 for a 23-carat diamond bracelet, millions of dollars on luxury homes, and $100,000 to a private fitness club. Merrill, Ledford and Jezierski allegedly perpetrated their fraudulent scheme by lying to investors, creating sham documents and forging signature. The victims included small business owners, restauranteurs, construction contractors, retirees, doctors, lawyers, accountants, bankers, talent agents, professional athletes, and financial advisors located in Maryland, Washington, D.C., Northern Virginia, Boulder, Texas, Chicago, New York, and elsewhere.

The SEC obtained an emergency asset freeze and the appointment of a receiver. The receiver is empowered to pursue actions on behalf of the receivership estate to recover assets for the benefit of defrauded investors, victims, and creditors. Avoidance (“clawback”) actions are often brought by a receiver in bankruptcy court after a Ponzi scheme or fraud is revealed. Clawback actions are commenced to recover funds distributed to victims or investors by the fraudster operating the Ponzi scheme or fraud.

Published on: July 17, 2020

NEW YORK SUPREME COURT CONFIRMS FORMER ADVISERS’ $6.68 MILLION ARBITRATION AWARD, INCLUDING LIQUIDATED DAMAGES, FOR CREDIT SUISSE’S VIOLATION OF THE NEW YORK LABOR LAW WHEN IT WITHHELD DEFERRED COMPENSATION

By Lax & Neville LLP

On July 17, 2020, the Supreme Court of the State of New York (Commercial Division) confirmed a FINRA Arbitration Award against Credit Suisse for approximately $6.68 million, including unlawfully withheld deferred compensation, interest, attorneys’ fees, and liquidated damages pursuant to the New York Labor Law. See Lerner and Winderbaum v. Credit Suisse Securities (USA) LLC, Index No. 652771/2019 (N.Y. Sup. Ct.), Doc. 140.

The two former Credit Suisse investment advisers, represented by Lax & Neville LLP, sued Credit Suisse for breach of contract, fraud and violation of the New York Labor Law after it closed its US wealth management business in October 2015 and cancelled their earned deferred compensation. Credit Suisse defended the claims on the grounds that its former advisers voluntarily resigned after it told them they were being terminated, that future compensation by their next employer “mitigated” their damages, and that the New York Labor Law does not apply to deferred compensation. A three member FINRA Arbitration Panel found for the advisers and ordered Credit Suisse to pay compensatory damages totaling $2,787,344 and interest, attorneys’ fees, FINRA forum fees, and liquidated damages equal to 100% of the advisers’ unpaid wages pursuant to New York Labor Law § 198(1-a). The FINRA Panel also recommended that the “Reason for Termination” on the advisers’ Form U-5 be changed from “Voluntary” to “terminated without cause.”

Credit Suisse petitioned to vacate the Award for manifest disregard of the law, “challeng[ing] FINRA’s finding that petitioners’ deferred compensation qualified as wages under Labor Law §198 (1-a).” Lerner at 3. Rejecting Credit Suisse’s petition to vacate the Award in its entirety, the Court held:

Published on: April 30, 2020

Merrill Lynch, RBC and Two Other Investment Advisory Firms to Return $4.72 Million to Investors for Improper Mutual Fund Fee Practices

By Lax & Neville LLP

The Securities and Exchange Commission (“SEC”) announced this month that four investment advisory firms—Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management—agreed to pay $4.72 million to settle charges that they recommended and sold mutual share classes to its customers when cheaper shares were available to those investors. The majority of that sum, namely, $3.88 million, is attributable to RBC Capital Markets. The mutual fund fee disgorgements resulting from the settlements with the SEC are part of the SEC’s initiative, launched in February 2018, wherein the SEC agreed to waive civil penalties against investment advisers who self-reported and admitted that they had been putting investors into high-fee mutual fund classes and agreed to reimburse those customers. These settlements are the last ones the SEC will accept as it concludes the mutual fund amnesty program.

A mutual fund share class represents an interest in the same portfolio of securities with the same investment objective, with the primary difference being the fee structures. For example, some mutual fund share classes charge what are called “12b-1 fees” to cover fund distribution and sometimes shareholder service expenses. Many mutual funds, however, also offer share classes that do not charge 12b-1 fees, and investors who hold these shares will almost always earn higher returns because the annual fund operating expenses tend to be lower over time.

In the various cease and desist orders, the SEC found that Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management purchased, recommended or held for their clients mutual fund share classes that paid the firms or the advisors 12b-1 fees instead of lower cost share classes of the same funds for which their customers are also eligible. The firms also failed to disclose these conflicts of interest, either in its Forms ADV or otherwise, related to their receipt of 12b-1 fees and/or the selection of mutual fund share classes that pay higher fees and result in higher commissions to the investment advisors. Investment advisors owe a fiduciary duty to their customers to act in their best interest, including disclosing conflicts of interest. The SEC found that the investment advisory firms’ failures to adequately disclose that the advisors were actually incentivized to recommend funds with higher fees when the same mutual funds without those fees were available violated the firms and advisors’ fiduciary duty to their customers.

Published on: April 24, 2020

New York Appellate Court Unanimously Affirms Confirmation of Former Adviser’s $1 Million FINRA Arbitration Award Against Credit Suisse

By Lax & Neville LLP

On April 23, 2020, a New York appellate court unanimously affirmed confirmation of a FINRA arbitration award against Credit Suisse for approximately $1 million in unlawfully withheld deferred compensation.

Credit Suisse had petitioned the New York Supreme Court (Commercial Division) to vacate the Award, arguing that, as a matter of law, (1) it did not terminate its investment advisers when it announced it was closing its US wealth management division and (2) its advisers were made whole by transition packages from their new employers. The Supreme Court rejected both arguments and denied Credit Suisse’s petition from the bench. Credit Suisse appealed on both grounds. Affirming, a five justice panel of the Appellate Division (First Department) cited with approval numerous cases holding that an employee who departs in the face of inevitable termination is constructively terminated. As for Credit Suisse’s defense that its liability can be offset or mitigated by the advisors’ transition package with a new employer, the Appellate Division found that Credit Suisse “offers no authority for the proposition that mitigation or offset is a defense to payment of vested compensation.”

Credit Suisse’s arguments on appeal are also its sole defenses to the dozens of claims brought by former advisers seeking more than $200 million in earned, vested deferred compensation it has refused to pay them in breach of the employment agreements and deferred compensation plans its own lawyers drafted. Seven FINRA arbitration panels have heard these defenses and rejected them, uniformly awarding deferred compensation to the advisers. The New York Supreme Court has heard these defenses and rejected them. Now, the New York Appellate Division has heard these defenses and unanimously rejected them on the law. By contract, New York law governs the deferred compensation arbitrations against Credit Suisse regardless of where a former adviser worked or files his or her claim. With a clear, unequivocal decision by a New York appeals court, Credit Suisse can no longer claim to rely upon its frivolous defenses in good faith.

Published on: July 8, 2019

Lax & Neville LLP Appointed Special Securities Counsel for Court Appointed Receiver

By Lax & Neville LLP

On September 18, 2017, Lax & Neville LLP was appointed special securities litigation counsel for court-appointed Receiver, Richard W. Barry, in an action commenced by the Attorney General of New Jersey on behalf of the Chief of the New Jersey Bureau of Securities. The action alleged securities fraud in the sale of securities, as well as other violations of the New Jersey Uniform Securities Laws, by defendants Osiris Fund Limited Partnership (a hedge fund), Peter Zuck, and others. State of New Jersey, et al. v. Peter Zuck, et al., Docket No.: HDU-C-125-12.

The Receiver—who was empowered to pursue actions on behalf of the receivership estate to recover assets for the benefit of defrauded investors, victims, and creditors—filed a motion to approve the retention of Lax & Neville LLP as special securities counsel to assist the Receiver in his duties and seek relief on behalf of those defrauded. Given the sophisticated nature of the securities-related issues, the Receiver sought to retain a law firm with specialized skill, knowledge and experience in securities law and arbitration. Lax & Neville LLP’s retention as special securities counsel was approved by court order on September 18, 2017.

On December 30, 2017, Lax & Neville LLP commenced a Financial Industry Regulatory Authority (“FINRA”) arbitration claim on the Receiver’s behalf against Interactive Brokers and Kevin Michael Fischer, who is the head of Interactive Brokers LLC’s block trading desk. The FINRA arbitration concerned the collapse of Osiris Fund, a fraudulent Ponzi scheme orchestrated by Peter Zuck, a convicted felon who was banned from the securities industry (specifically, the National Futures Association (“NFA”)) fifteen years before he opened accounts with Fischer at Interactive Brokers. The Receiver’s Statement of Claim alleged that, from April 2009 through December 2011, Interactive Brokers ignored numerous red flags, including obviously fraudulent account opening documents, suspicious fund transfers, ludicrously high “management fees,” and hundreds of e-mails and hours of recorded phone calls between Osiris Fund’s employees and Fischer. The Receiver further alleged that Interactive Brokers and Fisher became instrumental to the scheme, with Interactive Brokers providing substantial participation in the form of what was apparently a completely unsupervised platform that gave Osiris Fund credibility with Investors, and with Fischer participating substantially in marketing and solicitating new investors, recommending securities, directing Osiris Fund’s employees, and at times managing Osiris Fund’s investments himself. The Receiver alleged that Interactive Brokers, Fisher, and Osiris Fund defrauded approximately 72 investors out of approximately $6.5 million.

Published on: May 10, 2019

TWO MORE FORMER CREDIT SUISSE ADVISERS REPRESENTED BY LAX & NEVILLE LLP WIN FINRA AWARD, NEW YORK LABOR LAW CLAIMS AGAINST CREDIT SUISSE

By Lax & Neville LLP

On May 7, 2019, two former Credit Suisse investment advisers represented by Lax & Neville LLP won a $6.68 million FINRA arbitration award against Credit Suisse Securities (USA) LLC for unpaid deferred compensation and violations of the New York Labor Law (“NYLL”). This is the fourth FINRA Award against Credit Suisse for unpaid deferred compensation.

The claimants, Joseph Todd Lerner and Anna Sarai Winderbaum, were advisers in the New York branch of Credit Suisse’s US private banking division (“PBUSA”) and were terminated when Credit Suisse closed PBUSA. Credit Suisse took the position, as it has with hundreds of its former investment advisers, that Ms. Winderbaum and Mr. Lerner voluntarily resigned and forfeited their deferred compensation. A three member FINRA Arbitration Panel determined that Credit Suisse terminated Ms. Winderbaum and Mr. Lerner without cause, breached their employment agreements by cancelling their deferred compensation and violated the NYLL. The FINRA Panel was chaired by a law professor and expert in labor and employment law.

The FINRA Panel awarded Ms. Winderbaum and Mr. Lerner compensatory damages totaling $2,787,344, which included 100% of their deferred compensation awards, 2015 deferred compensation, and severance. Having concluded that the cancellation of deferred compensation violated the NYLL, the FINRA Panel awarded statutorily mandated interest, attorneys’ fees and liquidated damages equal to 100% of the unpaid compensation. See NYLL § 198(1-a). The FINRA Panel ordered Credit Suisse to pay 100% of the FINRA forum fees, totaling $50,250.00, and recommended expungement of Mr. Lerner and Ms. Winderbaum’s Form U-5, the termination notice a broker-dealer is required to file with FINRA. As with hundreds of their colleagues, Credit Suisse falsely reported that Mr. Lerner and Ms. Winderbaum’s “Reason for Termination” was “Voluntary,” i.e. that they voluntarily resigned. The FINRA Panel recommended that the “Reason for Termination” be changed to “terminated without cause.” The FINRA Panel also denied Credit Suisse’s counterclaims. To view this Award, visit 17-00057.